Assume that you will have a 10-year, $10,000 loan to repay to your parents when

Question

Assume that you will have a 10-year, $10,000 loan to repay to your parents when you graduate from college next month. The loan, plus 8 percent annual interest on the unpaid balance, is to be repaid in 10 annual installments of $1,490 each, beginning one year after you graduate. You have accepted a well-paying job and are considering an early settlement of the entire unpaid balance in just three years (immediately after making the third annual payment of $1,490).
Annual Interest Reduction in unpaid bal Unpaid balance
Year 1
Year 2
Year 3

Explanation / Answer

Year 1 Interest to to be paid = 10000 *0.08 = $800 Balance paid = $1490-$800 = $690 Remaining unpaid balance = $10000-$690 = $9310 Year 2 Interest to to be paid = 9310 *0.08 = $744.8 Balance paid = $1490-$744.8 = $745.2 Remaining unpaid balance = $9310-$745.2 = $8564.8 Year 3 Interest to to be paid = $8564.8 *0.08 = $685.18 Balance paid = $1490-$685.18 = $804.82 Remaining unpaid balance = $8564.8-$804.82= $7759.98

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